Planning a major corporate deal during and after a pandemic
Major deals like carve-outs, mergers, and acquisitions often times have costly surprises.
Before the COVID-19 crisis, the mergers and acquisitions (M&A) market was strong. Overall deal volumes were high, and private equity (PE)-backed buyouts had been on a consistent upward trend since the financial crisis. Market data specialist Refinitiv claims that 2019 was the fourth-strongest year on record for corporate dealmaking.
Then the Coronavirus struck. Against a backdrop of challenge almost unprecedented in living memory, business activity in many places slowed to a trickle, and M&A along with it. The question is, what will happen when the world’s economies open up again? Assuming there won’t be a ban on these deals as was proposed in April., one wonders, will the river stay dry, or will the trickle re-emerge as a torrent?
There are reasons to believe that, as the globe returns to work, we will see a spike in “carve-outs” – the purchases of a firm’s business unit rather than the entire firm itself. The logic is straightforward – firstly, reeling companies may face pressure to divest assets to generate the cash they need to stay afloat. Secondly, prices are likely to drop – deals which may have previously been shunned because the price tag was too high, may have now been moved to the bargain basement. Finally, private equity firms are still sitting on the same cash piles they were perching on before the pandemic – and that cash still needs to be spent. For these reasons, many anticipate a rise in carve-outs once the largest global economies emerge from lockdown.
A carve-out glut presents huge rewards and huge risks. On the one-hand, carve-out deals can help both the buyer and the seller. My firm recently polled 200 businesses across the world who had completed such a deal and found that 73% of corporates and 66% of private equity firms were happy with the transaction (in Canada, the figure was 88% for both corporates and PE firms combined).
But there was no shortage of horror stories. Roughly a third (27% of corporates globally and 34% of global PE firms) reported their most recent deal was unsuccessful. When you consider that the respondents’ median deal value was USD$51mn to $150mn, that represents a significant amount of money wasted or partially wasted.
Among the most common problems were delays, where 19% of corporates and 24% of private equity firms globally reported that the deals took longer to close than expected. This is crucial because the limbo period between the announcement of a carve-out and its completion will cost money. The purchaser may have to pay the seller to continue to undertake back-office functions, and the seller may not have been budgeted for this. A post-COVID economic recovery will create significant pressure to avoid this type of mistake.
So, what should a deal-hungry firm do? The report provides some answers.
Firstly, it’s safest to stick with places you know. Transactions were more likely to have been deemed successful if the purchased business unit was in a location where the purchaser already had a presence, compared to deals where the acquired business unit was in an unfamiliar location. Furthermore, deals conducted in familiar locations were more likely to be wrapped up quickly. The reasons for this are obvious: even in a globalized world, each jurisdiction has regulatory, compliance, legal and cultural quirks ready to trip up an unwary foreign firm. When asked what the greatest challenge to their most recent cross-border carve-out had been, the most common answer was “legal and regulatory issues”, cited by 52% of corporates and 48% of PE firms.
As economies start to rebuild while the COVID-19 impact begins to ease, businesses will start to look for new growth opportunities, at home and internationally. If you do, stick with what you know. If you must step boldly into unknown lands, invest in advisers who know the market very well.
Secondly, preparation will be more important than ever. One of the most famous dealmakers of the current era, Softbank’s Masayoshi Son, is notorious for making investment decisions seemingly on the fly, often after a presentation of less than an hour. This approach in our new world may not serve companies well. We asked respondents who experienced deal delays whether the situation would have improved with more preparation, and the response was overwhelming: 78% of corporates and 64% of PE firms said ‘yes’.
Not all preparation is equal. For example, 60% of firms reported they went into their most recent successful carve-out acquisition with a communications strategy thoroughly prepared. When asked about knowledge of the target’s industry and country-specific regulatory requirements, that figure drops to 49%. But at the opposite end of the scale, just 27% of respondents reported being thoroughly prepared to integrate personnel. A global economy recovering from a once-in-a-century economic shock is not an environment where purchasers can afford to make these kinds of mistakes. Now more than ever, thorough preparation – including advice, crunching numbers, and undertaking enhanced due diligence – is key.
This is not to say that companies should avoid carve-outs. Good businesses units will likely be on the market, possibly at competitive prices, and deals should be struck. But the backdrop will be unforgiving, and purchasing firms cannot afford to find themselves in the one-third of buyers who get things wrong.
This article was contributed by Larry Harding, Head of North America, TMF Group.
Marketing matters: from IBM to Kyndryl
Prior to joining Kyndryl as Chief Marketing Officer, Maria had a 25-year career at IBM, most recently as the tech giant’s CMO where she oversaw all marketing professionals and activities across North America, Canada and Latin America. She has held senior global marketing positions in a variety of disciplines and business units across IBM, most notably strategic initiatives in Smarter Cities and Watson Customer Engagement, as well as leading teams in services, business analytics, and mobile and industry solutions. She is known for her work with teams to leverage data, analytics and cloud technologies to build deeper engagements with customers and partners.
With a passion for marketing, business and people, and a recognized expert in data-driven marketing and brand engagement, Maria talks to Business Chief about her new role, her leadership style and what success means to her.
You've recently moved from IBM to Kyndryl, joining as CMO. Tell us about this exciting new role?
I’m Chief Marketing Officer for Kyndryl, the independent company that will be created following the separation from IBM of its Managed Infrastructure Services business, expected to occur by the end of 2021. My role is to plan, develop, and execute Kyndryl's marketing and advertising initiatives. This includes building a company culture and brand identity on which we base our marketing and advertising strategy.
We have an amazing opportunity ahead at Kyndryl to create a company brand that will stand apart in the market by leading with our people first. Once we are an independent company, each Kyndryl employee will advance the vital systems that power human progress. Our people are devoted, restless, empathetic, and anticipatory – key qualities needed as we build on existing customer relationships and cultivate new ones. Our people are at the heart of this business and I am deeply hopeful and excited for our future.
What experiences have helped prepare you for this new opportunity?
I’ve had a very rich and diverse career history at IBM that has lasted 25+ years. I started out in sales but landed explored opportunities at IBM in different roles, business units, geographies, and functions. Marketing and business are my passions and I landed on Marketing because it allowed me to utilize both my left and right brain, bringing together art and science. In college, I was no tonly a business major, but an art major. I love marketing because I can leverage my extensive knowledge of business, while also being able to think openly and creatively.
The opportunities I was given during my time at IBM and my natural curiosity have led me to the path I’m on now and there’s no better next career step than a once-in-a-lifetime-opportunity to help launch a company. The core of my role at Kyndryl is to create a culture centered on our people and growing up in my career at IBM has allowed me to see first-hand how to prioritize people and ensure they are at the heart of progress in everything Kyndryl will do.
How would you describe your leadership style?
I believe that people aren't your greatest assets, they are your only assets. My platform and background for leadership has always been grounded in authenticity to who I am and centered on diversity and inclusion. I immigrated to the US from Chile when I was 10 years old and so I know the power and beauty that comes from leaning into what makes you different from other people, and that's what I want every person in my marketing organization to feel – the value in bringing their most authentic self to work every day. The way our employees feel when they show up for themselves authentically is how they will also show up for our customers, and strong relationships drive growth.
I think this is especially true in light of a world forever changed by the pandemic. Living through such an unprecedented time has reinforced that we are all humans. We can't lead or care for one another without empathy and I think leaders everywhere have been reminded of this.
What’s the best leadership advice you’ve received?
When I was growing up as an immigrant in North Carolina, I often wanted to be just like everyone else. But my mother always told me: Be unique, be memorable – you have an authentic view and experience of the world that no one else will ever have, so don't try to be anyone else but you.
What does success look like to you?
I think the concept of success is multi-faceted. From a career perspective, being in a job where you're respected and appreciated, and where you can see how your contributions are providing value by motivating your teams to be better – that's success! From a personal perspective, there is no greater accomplishment than investing in the next generation. I love mentoring younger professionals – they are the future. I want my legacy as a leader to include providing value in work culture, but also in leaving a personal impact on the lives of professionals who will carry the workforce forward. Finding a position in life with a job and company that offers me a chance at all of that is what success looks like to me.
What advice would you give to your younger self just starting out in the industry?
I've always been a naturally curious person and it's easy for me to over-commit to projects that pique my interest. I've learned over years of practice how to manage that, so to my younger self I’d say… prioritize the things that are most important, and then become amazing at those things.